Software as a Commodity, or Less is More Profit

When the Wolfram Alpha iPhone app was released for $50, we all laughed. iPhone apps cost $2, not $50! When the music industry complains about piracy we’re unsympathetic – they should stop trying to charge $20 for a handful of MP3s! $10 for an eBook? That’s insane! It’s just bits!

There’s a kind of background smugness in the software industry about digital distribution dropping content prices to a commodity level, but although we deny the truth of it, we’re in exactly the same situation. The days of selling software to consumers for $50 a time are numbered, and that number can be stored in 11 bits. The bright side is, everyone will be better off. Well, except for any poor fools still trying to sell software for $50, that is.

What’s driving the change? Several things. Digital content stores are springing up, with friction-free single-click purchasing and delivery of software. The iPhone App Store. Steam. WiiWare. XBox Arcade. In every case, a strong indie scene is springing up, and typical prices have dropped from $50 for consumer software or games down to $15, $5, even 99c. Are developers cutting their own throats? Will our jobs all be outsourced to the lowest bidder? Will we become minimum-wage factory workers, churning out dirt-cheap software in a 3rd world sweatshop?

No, we’re all going to become rich. Commoditization may drive the price of a loaf of bread down to the cost of making a loaf of bread, but how much does it cost to make a copy of a piece of software? Well, almost nothing. And yet people will pay $2 for it, just because it’s less buggy than the free version, because it make their lives better. It doesn’t have to be very good to make their lives $2 worth of better, either.

Making more money by selling software for less hasn’t always been possible, which is perhaps why nobody’s noticed it yet. With a traditional software sale there’s the hidden cost to the customer of going to the effort of finding it on the web, evaluating it, creating an account, entering your credit card details and your address, deciding whether you really really trust this website and so on. Let’s say this was $20 worth of effort, although the real figure varies wildly between customers. Anyone trying to sell software this way for just $5 instead of $40 found it wasn’t selling 8 times as well. This is because it wasn’t 8 times cheaper to the customer – it cost them $5 + $20 in time and effort instead of $40 + $20; an overall $25 instead of $60. Sure, this is still a saving of just over 50%, but the software company is now taking $5 per copy instead of $40 on maybe half as many sales. The numbers just don’t work.

Friction-free payment and zero-cost distribution take this $20 of pain away, meaning at $5 your app doesn’t just appeal to people prepared to spend a total of $25 in time and money, but to the vastly larger group who will pay $5 for a latte if they can have it right there and then without filling in any paperwork. Soon, someone will make this work for web apps too. OpenID sign-in is a good start, but we need OpenID payment as soon as possible. I’m surprised you can’t sign in and pay with your Amazon account for more web services – after all, everyone has one of those already.

On the developer’s side of the fence, a standardized hardware platform decreases their support burden per sale dramatically. If you can test your software on half a dozen iPhone models and reasonable expect it to work on 99.9% of the iPhones out there, you drop your per-sale support costs to almost nothing. This is also necessary. In the web-app space these costs have always been low and even direct per-user costs such as compute time, data storage and bandwidth are dropping all the time.

Given the right environment a software company can make just as much money selling 1,000,000 units for $2 each as 10,000 for $200 each, only now 990,000 extra people are benefitting from the software, and the core audience of 10,000 have all saved $198 to spend on other things. Where will that money go? It won’t disappear. It’ll go elsewhere in the economy. A lot of it will be spent on more software – because there are a ton of tiny problems that would be worth solving for $2 that aren’t worth $200. Our society will start using and buying software ubiquitously. By 2020 almost all consumer software will sell for less than $10 and there’ll be more demand for software developers than ever before.

I love most of your posts, but on this one I think you drank the Kool-Aid. 20 years ago it was journalists all excited that micropayments were going to make them rich. And then all the “If just .1% of the Chinese people buy my product …” arguments. Will most developers sell tens of thousands of <$5 apps every year, and without significant middleman or marketing costs make as much they're making now? It's a nice fantasy, but I don't think latte economics works on apps. I think you'd like this to work, and that's leading to unwarranted optimism on the subject.